Resumen de la evaluación de datos

The economic approach to cost allocation may be very controversial. A conclusive analysis o f the economic theory in this field is beyond the scope o f this study.^6 However, a brief analysis o f the main approaches is necessary in order to carry out a meaningful assessment o f what constitutes cross-subsidisation in the context of communications. In relation to telecommunications, the activities are characterised by economies o f scale'^'^ in the provision o f networks (which derive from the fact that there

In the Access Notice para 118 the Commission refers to its decision in Brown Napier/British Sugar, OJ 1988, L 284/41 in which the margin between industrial and retail prices was reduced to the point where the wholesale purchasers with a packaging operation as efficient as those o f the wholesale supplier could not profitably serve the retail market.

See for a more detailed commentary see G. B. Abbamonte, "Cross-subsidisation and Community Competition Rules", 23 ELR (1998), 413 and F. Miller, “Predatory Pricing in Deregulated Telecommunications Market”, 21 World Competition (1997), 65.

Chapter IV Antonio F. Bavasso

are large elements o f cost that do not vary with the number o f customers or calls, even in the long run) and economies o f scope"^^ in the provision o f services which stem from the existence o f common costs (i.e. costs o f productions that are shared between two or more products). The implication o f this is that telecommunications companies tend to be multi-product firms and their ''pricing policies have to take into account the need to recover both the fix e d costs o f supplying a service and the common costs. Therefore undertakings in this sector enjoy, subject to regulation, a certain degree o f freedom to offer a range o f prices and to choose the market from which to recover their costs.

The traditional approach in cost allocation is based on Fully Distributed Cost (FDC) criterion which presupposes that all costs, including common costs, are allocated to particular outputs. However, recent economic debate has concentrated on two approaches and a combination o f them: Incremental Cost (IC), Stand Alone Cost (SAC) and "floors and ceilings" a p p r o a c h . T h e (average) incremental cost o f product i is the additional cost caused by producing that product rather than not producing it at all, divided by the number o f units o f product i holding constant the production o f other goods.*^ An activity which at least covers its incremental costs would not be deemed to be the recipient o f a cross su b sid y .* ^ The (average) Stand Alone Cost is the cost per unit o f producing i in isolation. These concepts can be combined by putting them into a "floors and ceilings" re la tio n s h ip .* ^ The assumption is that there is an absence o f subsidy when customers are being charged prices that reflect the cost o f serving them and no more. Therefore there is no subsidy if prices paid by consumers lie in the so called core area the floor o f which is defined by incremental costs and ceilings o f which are delimited by stand-alone costs. The alleged benefit o f this system is that new

^* Economies o f scope exist where average cost falls as more types o f products are produced.

See Oftel, ”The Application o f the Competition Act in the Telecommunications Sector", (January 2000), para 7.6. *® L. Hancher and J. Buendia Serra, supra note IV-67 above, at 906 which refers also to the Fully Distributed Cast

approach which consist in allocating all costs, including common costs, to a particular output..

*^ J. Vickers, “Regulation, Competition, and the Structure o f Prices”, 13 Oxford Review o f Economic Policy (I) (1997), 15, at 20.

*^ L. Hancher and J. Buendia Serra, ", supra note IV-67 above, at 907.

*^ This is the so called Faulhaber rule; see G. Faulhaber, "Cross-subsidization; Pricing in Public Enterprises" American Economic Review (1975), 966; W. J. Baumol, J. C. Panzar, and R.D. Willig, supra note 1-35 above; G. B. Abbamonte, supra note lV-76 above.

protected from excessive pricing by the stand alone ceiling.

In the communications sector we can think o f the example o f a telecoms operator which decides to use its structure to provide a new "convergent service". If the fees charged for the new service generate revenues equal or in excess o f the additional cost o f providing the service they will satisfy the floors and ceiling rule even if such fees are not sufficient to cover an equal or proportionate share o f the common costs.^"* Some criticisms have been made o f this approach particularly with regard to cost calculation.*^ One o f the main problems remains that o f the time horizon o f the analysis. Costs may be calculated from an historic perspective or on a current cost basis in the long or short run. In the context o f telecommunications this aspect will be dealt with more in relation to predatory pricing. It is doubtful whether this approach can provide a viable benchmark to establish predation or indeed other forms o f exclusionary pricing practices.